Standard and Poor’s have downgraded Greece’s credit rating to CCC from B. This is the lowest credit rating currently applied by S&P to any country they evaluate. The cut-off for an investment grade rating by S&P is BBB-. At CCC, the rating agency is expecting that the sovereign debt of Greece will either be re-structured or that they will partially default.
On 1 June 2011, Moody’s downgraded Greece to a Caa1 rating. The only country that has a worse rating than Greece, on the Moody’s rating system, is Ecuador.
Throughout the sovereign risk credit crisis in the Euro-area, the rating agencies have been behind the curve, opting to downgrade Greece long after the market had started to price for a fiscal crisis. S&P moved Greece to non-investment grade status in only late April 2010. At that point, the 2-year Greece government bond yield had already spiked up at 16%.
In recent days the Greece 2-year bond yield has moved back up to record levels of over 26% (see chart attached).
Without re-stating all the issues involved in Greece’s financial turmoil, it still appears that the authorities in the Euro-area are looking for a political solution to what is essentially an economic problem.
In May 2010, Greece was granted a EUR 110 billion ‘bail-out’ by the ECB/IMF. Since May 2010, almost half of these funds have been disbursed. The Euro-area Member States and the IMF together have disbursed EUR 53 billion: EUR 38.5 billion by the Euro-area Member States and EUR 14.5 billion by the IMF. The fifth disbursement, which was initially envisaged by end-June (but was revisited during the month) should amount to EUR 12 billion (EUR 8.7 billion by the euro-area Member States and EUR 3.3 billion by the IMF), bringing the total disbursements to EUR 65 billion out of the initial EUR 110 billion.
More than half of the EUR 53 billion disbursed so far (excluding the fifth disbursement) has been directed to fiscal deficit financing, while the rest has been used for rolling-over matured debt. Despite this assistance, Greece is likely to need more money, possibly as much as a further EUR 60 billion, partly because Greece has not been able to achieve the tax revenue targets set out in the May 2010 agreement (also no privatisation) and partly because the financing terms associated with the first bail-out were not that generous and are now adding to Greece’s fiscal problems.
The Greek authorities are still trying to pursue the ‘fiscal austerity’ route, not wishing to restructure or default on their debt. The Euro-area finance ministers have met on a number of occasions, and are scheduled to made a crucial announcement on the Greek fiscal position on 23/24 June. In the meantime, the politicking continues and the Greek government bond market is priced for default.
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